IDEAS home Printed from https://ideas.repec.org/p/boi/wpaper/2016.04.html
   My bibliography  Save this paper

Carry trade attractiveness: A time-varying currency risk premium approach

Author

Listed:
  • Ariel Mantzura

    (Bank of Israel)

  • Ben Z. Schrieber

    (Bank of Israel, Bar Ilan University)

Abstract

This study investigates the attractiveness of carry trade strategies in the Israeli FX market during the period 1/2003 - 12/2014. We examine several Carry To Risk (CTR) popular measures and propose a new measure which is based on a time-varying currency risk premium. The predictive capability of the examined CTRs is examined on foreigners' holdings in Israeli government bonds using a proprietary data set. In order to estimate the currency risk premium we also assess the Covered Interest rate Parity (CIP) and the Uncovered Interest rate Parity (UIP) hypotheses. We find that the CIP hypothesis did not hold during the second half of the sample period while the UIP hypothesis did not hold along the entire sample period for a one-month horizon, but prevailed for the twelve-month horizon. We find, using various methodologies, that our proposed CTR measure predicted foreigners' positions in government bonds during the second sub-sample. Such a prediction was more robust and of longer duration than other popular CTR measures.

Suggested Citation

  • Ariel Mantzura & Ben Z. Schrieber, 2016. "Carry trade attractiveness: A time-varying currency risk premium approach," Bank of Israel Working Papers 2016.04, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2016.04
    as

    Download full text from publisher

    File URL: https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2016.04.pdf
    File Function: First version, 2016
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sussman, Nathan & Saadon, Yossi, 2018. "Nominal exchange rate dynamics and monetary policy: uncovered interest rate parity and purchasing power parity revisited," CEPR Discussion Papers 13235, C.E.P.R. Discussion Papers.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boi:wpaper:2016.04. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Yossi Yakhin (email available below). General contact details of provider: https://edirc.repec.org/data/boigvil.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.